I. Field of the Invention
The invention relates to a system and method of receiving and transmitting electronic payments between and among financial institutions in which payments are final when transmitted.
II. Description of the Related Art
A person (individual or corporate) making a payment in the United States has an array of payment instruments from which to choose. It is likely that most single transactions still are paid for in cash (coin and currency). There are also checks and other paper instruments (travelers' checks, money orders, and official checks) and debit and credit entries processed by automated clearing houses ("ACH", a computer based, batch processing electronic payment mechanism that supports both credit and debit transfers and is used primarily for low-dollar transactions such as direct deposit of payroll and benefit payments and mortgage and insurance premium payments that can be scheduled some time in advance and that are not time-critical). The largest payments, however, usually are sent by funds transfers. Each day, the two principal funds transfer systems, Fedwire and CHIPS ("Clearing House Interbank Payments System"), transfer hundreds of thousands of payments worth more than $2 trillion. The average size of a funds transfer is very large--about $6 million on CHIPS and $3 million on Fedwire.
Funds transfers can involve a number of different parties. Many transfers take place to settle obligations of two banks, such as the delivery or return of "fed funds" (a bank's deposits with its Federal Reserve Bank). In these cases, only the two banks will be involved. Banks also transfer funds on behalf of customers. These transfers may be to another person, either at the same bank or at another bank. Sometimes a customer will move funds between two of its own accounts, either at different banks or at the same bank, for example, from local accounts used to collect bills to a cash concentration account or to a payroll account.
A funds transfer may involve a single bank (a "book-transfer") or it may involve several. In most cases, the originator will not specify the method for carrying out his payment order, and the originator's bank will select the most efficient way to have the funds sent to the beneficiary, including choosing a network or intermediary bank.
For simplicity in analyzing how the funds transfer system works, one example will be used: Customer X orders his bank, Bank A, to pay $10,000 to the account of Customer Y at Bank B. The following will look at the different stages of the funds transfer and the various options open to the parties at each stage: How Customer X transmits the payment order to Bank A; how Bank A transmits the payment order to Bank B; how Bank B notifies Customer Y and makes the funds available to him; and how Banks A and B settle their balances.
A. Origination Of Funds Transfer
There are many ways for a person to order his bank to send a funds transfer. Probably the largest number of funds transfers, and certainly those involving the highest monetary value, are those originated by corporations with a direct computer-to-computer link to the bank. In these cases, the customer enters the payment instructions into his computer, and the computer sends the payment order directly to his bank's computer. The bank's computer "edits" the payment order. If the payment order fails one of the edits, for example, if mandatory information has not been included in the payment order, the computer routes the payment order to an operator's screen, and the operator makes any necessary corrections or seeks (or has someone else in the bank seek) clarification from the customer. A similar procedure is used for customers that use a personal computer to transmit payment messages to the bank.
Individuals generally must go to the bank to fill out a form and pay a fee for a funds-transfer service. Individuals with large bank balances and small companies may have a personal banker or account officer. To send a funds transfer, these persons telephone the officer and give the transfer instructions, usually after the authenticity of the call has been established through code word or call-back procedures. The officer either enters the payment order directly into the bank's computer at his own computer terminal or fills out a form for delivery to the bank's funds transfer department where it is entered in the bank's computer. Many banks are now offering "home banking" products that allow individual consumers to deal directly with the bank's computer by way of their own personal computers.
B. Originator's Bank's Acceptance Of Payment Order
Once the payment order has been entered into the bank's funds-transfer computer system and passes the initial edits, it is checked against the customer's demand account balance. If the balance is sufficient, the bank executes the payment order by issuing a corresponding payment order to a funds-transfer network or the next bank in the funds transfer. If the customer does not have a sufficient balance in his account, the computer checks to see if the customer has an available credit line. If so, the payment is released; if not, the payment is held pending receipt of funds to cover the payment. If covering funds have not been received by the late afternoon (usually 2:00 to 4:00 P.M.), the payment order may be referred to a credit officer who will decide whether to extend additional credit to the customer to enable the payment to be made.
If a payment order has not been sent on by the end of the execution date (the date that the bank may properly issue a payment order in execution of the sender's order), the bank will normally reject it by sending a notice of the rejection to the sender.
C. Transfers Between Banks
If there is more than one bank involved in a funds transfer, it is necessary for funds to be moved from one bank to the other. In the U.S., this can be accomplished by using one of the two large-dollar funds transfer networks to be discussed below, or through the adjustment of correspondent balances.
1. FEDWIRE PA1 2. CHIPS PA1 Note: Although Bank B may give Customer Y use of the funds, the payment is not final until settlement has taken place. PA1 3. Correspondent Balances PA1 4. Book Transfers PA1 1. FEDWIRE PA1 2. CHIPS PA1 3. German EAF 2 System PA1 A payment input from the EIL-ZV (the gross settlement system by the Bundesbank) increases the account balance, which is then used to cover the net balances. PA1 A payment input in the EAF 2 itself (in favor of participants with debit balances) changes the net balances between the participants; the liquidity on the giro accounts remain unchanged.
Fedwire is the funds transfer network operated by the 12 Federal Reserve Banks. It is a real-time, gross settlement system, meaning that the payment is final and irrevocable at the time the Federal Reserve Bank credits the account on its books of the receiving bank. There is thus no risk that the receiving bank will suffer a loss if it makes the funds available to the beneficiary and the sender cannot pay the amount of the payment order to its Federal Reserve Bank. In such a case, the Federal Reserve Bank would suffer the loss, not the receiving bank.
Fedwire is available to any depository institution that has a reserve or clearing account at a Federal Reserve Bank. There are currently about 10,000 such institutions. About 7,000 of these institutions have an "on-line" connection to their Federal Reserve Banks, most through a "Fedline" terminal linked to the Federal Reserve Bank by dial-up telephone connections or leased lines; about 200 of the largest institutions have direct computer-to-computer interfaces. An institution with an on-line connection may send and receive Fedwire payment orders to and from the Fedwire computer automatically without manual processing by Federal Reserve Bank personnel. The Federal Reserve Bank will send a computer message to the sender acknowledging the payment order. About 99 percent of Fedwire transfers originate with on-line payment orders.
"Off-line" transactions usually require the sender to telephone its Federal Reserve Bank, with the payment order authenticated by the use of codes or other procedures established by the Federal Reserve Bank. These telephone calls are also tape recorded. Following authentication, Federal Reserve Bank personnel enter the payment order into the Fedwire computer. Because of the manual processing involved, the Federal Reserve Banks charge significantly more for off-line transfers than for on-line ones.
A payment order received by a Federal Reserve Bank is routed to a Fedwire processing computer. This computer performs system edits and routes the payment order to the receiving Federal Reserve Bank, which automatically credits the receiving bank's account and sends an advice to the receiving bank.
Example 1 below shows the progress of a funds transfer involving a Fedwire payment order, noting the appropriate accounting entries. Settlements between Federal Reserve Banks are also discussed below.